Last week I discussed how making mistakes in pricing leaves money on the table - the paradox of pricing; Price strategy is a key resource for companies to increase their competitive advantage, yet most don’t have a strategy or process to set their prices. Nine times out of ten, business planning on pricing is dominated by the fear of losing customers if prices are raised.
Yet their margins will suffer if they don’t.
And I gave you the first two of ten common mistakes businesses make from an article by Dennis Brown from Atenga Inc. (www.atenga.com )- “Ten Common Mistakes Companies Make in Pricing their Products or Services”. Atenga specialises in specialises in developing price optimisation strategies for businesses.
Mistake #3: Companies attempt to achieve the same profit margin across different product lines.
Some financial strategies support a drive for uniformity, and companies try to achieve identical profit margins for disparate product lines. The iron law of pricing is that different customers will assign different values to identical products. For any single product, profit is optimized when the price reflects the customer’s willingness to pay. This willingness to pay is a reflection of his or her perception of value of that product, and the profit margin in another product line is completely irrelevant.
The Wall Street Journal reported on March 27 of this year how the industrial behemoth Parker had a uniform 35% gross profit objective across its 800,000 products. They were stuck in a “profit-margin rut.” A new CEO in 2002 determined to change this. The change was championed in the face of determined opposition from the division managers. “There was so much pushback,” according to the Journal, “the CEO eventually assembled a list of the 50 most commonly given reasons why the new pricing scheme would fail. If a manager came up with an argument not already on the list, then Mr. Washkewicz agreed to hear it out. Otherwise, he told them, get on board.” The company credits the new pricing program with adding $200 million to their bottom line, improving return-on invested capital from 7% to 21% and its shares have gained nearly 88%.
Mistake #4: Companies fail to segment their customers.
Customer segments are differentiated by the customers’ different requirements for your product. The value proposition for any product or service is different in different market segments, and the price strategy must reflect that difference. Your price realization strategy should include options that tailor your product, packaging, delivery options, marketing message and your pricing structure to particular customer segments, in order to capture the additional value created for these segments.
One Atenga client developed an innovative software product. They priced the desktop version at $79.00 per seat, a figure that “felt right” for the executive team. Sales stagnated. Atenga research showed that there were two distinct market segments: consumers and professionals. The $79.00 price was too high for the consumers who were interested in purchasing the product, and too low for the professionals. It communicated “not a serious tool” for the professionals who were interested in its value proposition. As a result of this research, the company decided to focus on the professional marketplace, and raised the price to $129.00. Sales soared.
(After a workshop for a client I received an email from an attendee thanking me for the content. He also said “Also the cost is too low and therefore appears not to be valuable.” AG)
Mistake #5: Companies hold prices at the same level for too long, ignoring changes in costs, competitive environment and in customers’ preferences.
While we don’t advocate changing prices every day, the fact is that most companies fear the uproar of a price change and put it off as long as possible. Savvy companies accustom their customers and their sales forces to frequent price changes. The process of keeping customers informed of price changes can, in reality, be a component of good customer service.
Marketplaces change radically in a short period of time. It is important to recognize that the value proposition of your products changes along with changes in the marketplace, and you must adjust your pricing to reflect these changes.
One Atenga customer sells services to the biopharmaceutical marketplace. Over the past few years, demands for its services have increased dramatically, and the entire industry has run into limitations in the number of trained personnel to do the work, and restricted capacity in terms of the required facilities and equipment. The company has held prices constant for the past seven years, even in the face of rising costs for capable staff. Atenga research found that customers believed the company was the best “value for money” in the industry, and they could raise prices about 12% without impacting sales. The additional 12%, however, more than doubled the company’s profits in the second quarter after it was initiated.
Here are the takeaways:
I’ll pass on another three mistakes next week.
In the meantime, pour yourself a coffee or a cuppa and take 10 minutes to consider whether you are making any of these mistakes. You could be leaving money on the table, money which is all profit.
Do you face that dilemma, trying to reconcile the need to improve profitability with the threat of losing customers if you do raise your prices? If you would like to discuss how you could generate a continuous stream of profitable customers, keep those customers and minimise customer churn through an improved pricing strategy, contact me. There’s no cost for a consultation. It is my gift to you.
© Copyright 2016 Adam Gordon, The Profits Leak Detective
Some profit losses are pretty obvious - so you fix them.
BUT, what if you don't know profits are leaking, cash out the door?
Possible leaks could be anywhere.
Are there some clues or symptoms that are tell-tales?